BIR Ruling [DA-173-97]

April 16, 1997 BIR RULING [DA-173-97] Roco Buag Kapunan & Migallos Law Offices 16th Floor, Strata 200 Bldg. Ameral Avenue, Pasig City 1600 Attention: Attys . Mario C . Buag and Imelda Riza P . del Rosario Gentlemen : This refers to your letter dated January 27, 1997 stating that your client, CAROSAL DEVELOPMENT is a domestic corporation, organized and registered under Philippine Laws; that it has an authorized capital stock of Sixty Million Pesos (P60,000,000.00), divided into Six Hundred Thousand (600,000) shares of stock, with a par value of One Hundred Pesos (P100.00) per share, of which Three Hundred Ninety Thousand (390,000) common shares of stock with an aggregate par value of Thirty Nine Million Pesos (P39,000,000.00) are issued and outstanding as of December 31, 1995; that as of the same date, it had a total stockholder's equity in the amount of Seventy Three Million Four Hundred Forty Four Thousand Seven Hundred Six and 40/100 Pesos (P73,444,786.40) which includes unrestricted retained earnings in the amount of Thirty Four Million Four Hundred Forty Four Thousand Seven Hundred Eighty Six and 40/100 (34,444,786.40); that it proposes to declare a portion of its retained earnings as of December 31, 1995 as property dividends in favor of all stockholders of record as of the date of the Board meeting during which the dividends are declared; that Carosal's stockholders of records who are all individuals shall execute a Deed of Assignment over the declared dividends in favor of one stockholder of record for the purpose of facilitating dealings thereon and shall not be construed as a waiver of their respective shares in the declared dividends; that said dividends shall be distributed in the form of real properties consisting of six (6) parcels of land, with an aggregate area of 3,838.5 square meters, more or less and all improvements thereon consisting substantially of an old residential house with a total book value of One Million Six Hundred Eighty Seven Thousand Sixty Three and 60/100 Pesos (P1,687,063.60) covered by Transfer Certificate of Title Nos. 121179, 121180, 121181, 121182, 121183 and 121184, all registered with the Registry of Deeds for the City of Manila; that the aforementioned real properties have not produced any income for CAROSAL nor the same have been utilized in the trade or business of CAROSAL; that said realties declared as dividends are recorded in the books of CAROSAL at their book value; and that the total book value of the property dividends is equivalent only to two and six hundredths percent (2.06%) of Carosal's asset for the year ended December 31, 1995. cdta Based on the foregoing, you are requesting confirmation of your opinion of the following, viz: "1. The property dividends consisting of real estate properties can be recorded at book value in the books of both the issuing corporation and the recipient stockholders." "2. The proposed property dividends which shall be received by the stockholders of CAROSAL shall be subject to a final withholding tax at zero percent (0%), and the receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of the real estate properties as property dividends." However, property dividends which are distributed by Carosal to its stockholders and declared out of the retained earnings beginning January 1, 1996 shall be subject to VAT based on the market value or zonal valuation, whichever is higher, at the time of receipt." "3. The subsequent sale or other disposition of the real estate properties received as property dividends by Carosal's stockholders shall be subject to the five percent (5%) capital gains tax based on the gross selling price or fair market value prevailing at the time of the sale whichever is higher under Section 21(e) of the Tax Code, as amended and the fact that the property dividend is placed in the name of one of the stockholders for convenience does not affect this tax treatment." "4. The Deed of Conveyance to be executed between Carosal and the recipient stockholders covering the real estate properties declared as property dividends, not being a sale and without monetary consideration shall not be subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended but only to the documentary stamp tax of Ten Pesos (P10.00) pursuant to Section 188 of the Tax Code, as amended. (BIR Ruling Nos. 108-93 dated March 16, 1993; 498-93 dated December 20. 1993). "5. The book value of the property dividends (real properties) must be annotated at the back of the Transfer Certificates of Title of the real properties which shall serve as the basis of the computation upon their subsequent disposition." cdti In reply, please be informed as follows: 1. That the property dividend shall be recorded at the book value in the books of both the issuing corporation and the recipient stockholders. The BIR Ruling No. 21(c) (2)-028-89-130-89 applying Section 250 and 251 of Revenue Regulations No. 2 stating that dividends paid in securities or other property (other than its own stock) in which the earnings of a corporation have been invested are income to the recipient to the amount of the full market value of such property when receivable by individual stockholders has already been modified having been rendered obsolete by Executive Order No. 37 (effective August 1, 1986)subjecting to income tax at 0% effective January 1, 1989, dividends received from a domestic corporation and the share of an individual partner in a partnership subject to tax under Sec. 24(a) of the Tax Code, as amended. (BIR Ruling No. 279-91 dated December 26, 1991) 2. That the proposed property dividends which shall be received by the stockholders of CAROSAL shall be subject to a final withholding tax of zero (0%) percent, and the receiving stockholders shall not be subject to any income or capital gains tax arising from their receipt of these properties as property dividend. [Section 21 (c) (2) of the Tax Code, as amended by E. O. No. 37]. However, certificates authorizing transfer of real estate properties without payment of the capital gains tax shall be secured from the Revenue District Officer of the Revenue District where the property is located before said properties are transferred in the name of the recipient stockholders (BIR Ruling No. 028-89 dated February 22, 1989). Moreover, property dividends which are distributed by Carosal to its stockholders and declared out of the retained earnings beginning January 1, 1996 shall be subject to VAT based on the market value or zonal valuation, whichever is higher, at the time of receipt." 3. That CAROSAL shall not be subject to any income or capital gains tax on the difference between the fair market value and the book value of the real estate properties declared and distributed as dividends. This is because there is no realized gain considering the fact that the value used at the time of distribution is the book value. 4. That upon subsequent sale or other disposition received as dividends by the stockholders, the basis of such shall also be the book value at the time of the dividend distribution. 5. That the amount of the documentary stamp tax on the Deeds of Conveyance to be executed between CAROSAL and the recipient stockholders covering the real estate properties declared as property dividends, not being a sale and without monetary consideration shall not be subject to the documentary stamp tax under Section 196 of the Tax Code, as amended, but only to the documentary stamp tax of P15.00 pursuant to Section 188 of the same Code, as amended. (BIR Ruling No. 156-94 dated November 16, 1994) This shall serve as your authority to obtain the necessary certificates authorizing transfer of the real estate properties from the Revenue District Officer of the Revenue District Office where the real properties are located. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)